Governor’s power to act is limited by the courts, Democratic opposition, and shortage of simple solutions

Gov. Chris Christie’s dire warning about the threat to New Jersey’s finances posed by unfunded pension liabilities may actually understate the magnitude of the problem. But Christie’s options for tackling the issue are sharply limited by politics, the courts, past legislation, and a lack of simple solutions.

Christie touched off a firestorm of protest from Democrats and union leaders when he used his budget speech to complain that the $2.25 billion pension payment required next year by the 2011 law he teamed up with Senate President Stephen Sweeney (D-Gloucester) to pass -- combined with rising debt and retiree health benefit costs -- was preventing the state from increasing spending on education, colleges, transportation, healthcare, and other vital needs.

By Fiscal Year 2018, when the seven-year phase-in to the full actuary-recommended funding of the pension system is completed, New Jersey will be required to pay an estimated $4 billion to $5 billion -- more than 10 percent of its budget -- to cover pension liabilities for the state’s 800,000 current and retired teachers, police, firefighters, and other state and local government employees. Even then, the problem won't be solved: The pension system that year will still be $52 billion in the red, Christie noted

“I’m ready to work with the entire Legislature to come up with ideas to fix this, but if they’re unwilling to do that, this is a problem we’re going to own” Christie said at a town hall meeting in Long Hill Township Wednesday. “I’m willing to take more extreme measures.” He added later that night on his monthly radio show on 101.5 FM that he had “significant powers” to make changes to the pension system through “executive action.”

Former state Treasurer David Rousseau, who implemented two pension reform measures under Democratic Gov. Jon Corzine before Christie took office, dismissed Christie’s assertion. “There are no extreme measures,” said Rousseau, now the budget analyst for liberal New Jersey Policy Perspective. “It’s a red herring. There is nothing he can do unilaterally to change pensions for public employees.”

In New Jersey, pensions for public employees are not negotiated through collective bargaining, but are modified through laws passed by the Legislature and signed by the governor. The Democratic-controlled Senate and Assembly would certainly challenge any attempt by Christie to modify pensions by executive order, as would the unions. In fact, unions are awaiting a decision by an appeals panel on their lawsuit challenging the Christie-Sweeney bill’s elimination of cost-of-living adjustments to retirees.

Good Enough for the Private Sector

Christie clearly does not have the power to launch the transition from a defined-benefit pension plan to a 401K-style defined contribution plan that Michigan has pioneered. Nevertheless, Christie expressed support for the 401K option during his Long Hill town meeting, saying “it’s where most of America has gone” and that “if it’s good enough for the private sector,” it should be good enough for government employees.

“There’s no doubt that five or 10 or 15 years from now, we will see a phasing in of 401Ks and a phasing out of defined-contribution plans,” said Assembly Minority Leader Jon Bramnick (R-Union). “It’s inevitable because of the cost. You have to make sure you don’t harm the pensions of people already in the system, which means you have to phase it in carefully. And since the Democrats are saying they are not willing to do anything now, it will not happen quickly. But it will happen.”

In fact, despite Christie’s repeated warnings that Detroit’s bankruptcy due to $9.5 billion in unfunded pension and retiree health-benefit liabilities offers “a preview of what could happen to us,” New Jersey no longer makes Moody’s Investors Service’s most recent top 10 list of the states with the largest unfunded pension liabilities as a percentage of annual state budget.

Illinois’ $187 billion pension shortfall in 2012 represented a whopping 308 percent of state revenues, and No. 2 Connecticut’s $57 billion clocked in at 243 percent of its annual state budget. Maryland, Massachusetts, Maine, and even oil-rich Texas and Louisiana ranked ahead of 11th-place New Jersey, whose $57 billion pension liability equaled 126 percent of its budget that year.

Like most states, New Jersey got into trouble because a succession of Republican and Democratic governors and legislatures kept voting additional benefits for public employee unions in a competition for their campaign support, while failing to make the pension contributions required to keep the pension system solvent. In fact, in the 15 years before Christie took office, five governors paid a total of just $3.4 billion into the system -- and $2.2 billion of that was by Corzine.